Penalties for Unallowable Costs
Including unallowable costs in final indirect cost proposals can result in significant financial penalties and interest for contractors.
Overview
FAR 52.242-3, "Penalties for Unallowable Costs," establishes the rules and penalties for contractors who include unallowable indirect costs in their final indirect cost rate proposals or final statements of costs. The clause defines what constitutes a proposal and clarifies that contractors must not include costs that are unallowable under FAR Subpart 2.1 or agency supplements. If a contractor submits a proposal with expressly unallowable costs, they are subject to penalties, including repayment of the disallowed amount plus interest. If the cost was previously determined unallowable, the penalty doubles. The clause also outlines the process for penalty assessment, possible waivers, and clarifies that penalty payments do not count as repayment of the unallowable costs themselves.
Key Rules
- Definition of Proposal
- Covers final indirect cost rate proposals and final statements of costs for incentive price revision contracts.
- Prohibition on Unallowable Costs
- Contractors must not include unallowable costs as defined by FAR or agency supplements in any proposal.
- Penalties for Unallowable Costs
- Penalties include repayment of the disallowed cost plus interest, or double the amount if the cost was previously determined unallowable.
- Finality of Determinations
- Contracting Officer's penalty determinations are final decisions under the Contract Disputes Act.
- Waiver of Penalties
- Penalties may be waived under certain criteria in FAR 42.709-6.
Responsibilities
- Contracting Officers: Assess penalties, determine allowability, and consider waivers.
- Contractors: Ensure proposals exclude unallowable costs, pay assessed penalties, and maintain compliance with cost principles.
- Agencies: Oversee compliance and enforce penalty provisions.
Practical Implications
- This clause deters contractors from including unallowable costs in proposals by imposing financial penalties.
- Contractors must have robust internal controls to identify and exclude unallowable costs.
- Failure to comply can result in significant financial penalties and interest, as well as potential disputes.